Deferred Tax

Deferred TaxLets Get StartedDefinitionsAccounting profit is the profit or loss before taxation for a period reported in the financial statements of an entity.Taxable profit is the profit or loss for the period determined in accordance with the provisions of income tax laws and rules. Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.Taxable temporary differences are temporary differences that will result in taxable amounts in determining taxable profit of future periods when the carrying amount of the asset or liability is recovered or settled.Deductible temporary differences are temporary differences that will result in amounts that are deductible in determining taxable profit of future periods when the carrying amount of the asset or liability is recovered or settled. Causes for Temporary DifferencesIncome Tax Laws define criteria for recognition of certain income/expenses while determining the taxable profit; which may be different from the criteria as permitted by International Accounting Standard while preparing accounting profit. As a result, taxable profit may not be the same as accounting profit.

There may be Temporary differences between the two. That is, accounting profit may be higher than taxable profit this year, but will be lower in a future year so that cumulative profit will be the same for both.

Example of Temporary DifferencesDepreciationTax depreciation rates are normally higher than the accounting depreciation rates.50% of the cost of assets is allowed as initial depreciation in the first year. (initial depreciation allowance is now reduced to 25% for plant and machinery and 15% for building w.e.f. FY2014).Incremental depreciation on revaluation surplus on fixed assets is not allowed for tax purpose.

Therefore taxable profit is determined as below:Accounting profitxxxAdd: accounting depreciationxxxLess: tax depreciation(xxx)Taxable profitxxx

Depreciation

Accounting depreciationTax depreciationTax profit / (loss)2009232(3915)(3683)2010241(483)(242)2011325(480)(155)2012326(396)(70)2013343(421)(78)2014595(419)176Historical data of Gharibwal Cement Limited ( figures in million Rupees)Future Periods12603(1967)10636Due to accelerated depreciation, about 65% cost of the assets is allowed as depreciation expense in the first year while determining taxable profit which means that taxable profits are less than accounting profits in early years of assets life.

The difference between two will reduce with passage of time and after certain time the equation become reverse when taxable profit will be higher than accounting profit. The companys tax liability will be higher as well.Since we know that a future tax liability exists and can compute its amount, we need to report it in the companys balance sheet. This is the essence of deferred taxes.A deferred tax liability must be accrued for the future tax liability (taxable income multiplied by the firms tax rate). This liability will remain on the companys balance sheet.Figure in million RupeesAccounting ValueTax baseTemporary differenceDeferred tax @ 35%Depreciation on Fixed assetsABC=A-BD=C * 35%Cost7315(1967)43481872Revaluation surplus5288052881851Taxable temporary differences12603(1967)106363723Lease finance(5)0(5)(1)Retirement benefits(22)0(22)(8)Deductible temporary differences(27)0(27)(9)Net Taxable temporary differences12576(1967)106093714Future export covered under FTR ~12%(1312)(459)Gross Deferred Tax Liability92983254Unused tax losses (depreciation losses)(4545)(1591)Taxable temporary differences under NTR47521664Figure in million RupeesAccounting ValueTax baseTemporary differenceDeferred tax @ 35%Taxable temporary differences under NTR47521664Tax credit u/s 113(2) minimum tax(232)Tax credit u/s 113C Alternative Corporate Tax(255)Deferred Tax liability as at 31-12-20141177Opening balance of deferred tax at 01-07-2014(905)Tax rate difference (34% to 35%)(111)Deferred tax expense for the period16120112012201320142015Minimum tax balance B/F - 31 78 107 189 Minimum Tax assessed 31 47 29 82 43 Minimum tax expired - - - - - Minimum tax adjusted - - - - - Balance carried forward 31 78 107 189 232 ACT balance B/F - - - - 146 ACT assessed - - - 146 109 ACT expired - - - - - ACT adjusted - - - - - Balance carried forward - - - 146 254 Tax credits available: Tax credit u/s 113(2) is available on account of minimum tax and can be adjusted against the normal corporate tax within 5 years; whereas tax credit u/s 113C is available on account of ACT and can be adjusted against normal corporate tax within 10 years.In the presence of heavy tax losses of Rs. 4.4 billion, and due to initial depreciation on waste heat recovery and conveyer belt project it is expected that the Company will pay ACT @ 17% till FY2019.

So minimum tax amounting to Rs. 107 million will not be recovered/adjusted and will be expired.THE END